Investor-board engagement is a growing trend, with many of the world’s largest asset managers, including BlackRock, Vanguard and State Street, expanding their stewardship teams to engage more frequently with both management and boards of their investee companies. Many directors either shun or fear these meetings, often because they know they’re going to be asked pointed questions that they may not be able to answer very well, particularly on environmental, social and governance (ESG) issues—which are increasingly becoming investor priorities.
Environmental and sustainability issues
Boards can be certain that climate change will be high on the investor agenda as demonstrated by a shift in policy at some of the world’s largest asset managers in 2017. What does this mean for directors?
For some, it will mean business as usual because they have already incorporated climate risks and opportunities, as well as other relevant environmental and social business issues, into their strategies and operations, including their compensation plans. These boards and management teams are able to demonstrate that they understand and seek to continuously evolve their understanding of environmental issues, and provide robust disclosure in both their written and oral communications. They recognize that sustainability reporting isn’t just limited to the sustainability report, but is an integral part of all corporate reporting, indicating an integrated approach. They may even do away with their sustainability report altogether.
For others, it will be an uncomfortable realization that investors are holding individual directors accountable for the board’s lack of oversight and disclosure over climate-related risks, as was the case at the Exxon Mobil 2017 annual general meeting.
Investor action should not be expected to be limited only to industries having high carbon emissions. As investors further their understanding of the impact of climate change and other sustainability factors on their portfolios, they will triage their efforts across all sectors, seeking to engage with boards of companies that perform poorly. They will want to understand whether and how the board oversees these risks, and will ask for certain changes in practices and disclosure. This may even extend to changes in board composition if investors feel that the current board’s expertise is inadequate.
Board composition and evaluation
Investors have played a significant role in advancing board diversity, which will continue to be a focal point in 2017-18, as will issues of board tenure. But many are going farther on board composition and board evaluation: BlackRock’s 2017-18 governance priorities stated that it will “seek to better understand how boards assess their performance and the skills and expertise needed to take the company through its future multi-year strategy (rather than the last one).”
At this year’s International Corporate Governance Network conference in Asia, a straw poll at a session on investor-board engagement found that roughly half the asset managers/owners in attendance now ask for the action plan from the last board evaluation in their engagements. If no action plan exists, or if the plan only mentions some minor issues, this tends to be viewed a red flag rather than a hallmark of a high-performing board. Individual director evaluations may also arise, particularly if the board has long-tenured directors or board members whose backgrounds lack an obvious nexus to the company’s business. State Street takes the view that effective board composition should consist of “a mix of independent directors with direct industry experience and with experience relevant to the company’s long-term business strategy.”
No quick fixes
There are no quick fixes to ESG issues: you’ve either invested in making your board members climate savvy, addressed gaps in board composition and adopted a robust evaluation process or you haven’t. Rather than scrambling for answers at the last minute, boards that get out ahead of these issues have much to gain. Not only will directors come out of investor meetings unsinged, they most likely will have assured investors that their board is truly world-class.
I wish to thank Catherine Jackson of Jackson Principled Governance for authoring the environmental and sustainability portion of this column. E-mail: Catherine.firstname.lastname@example.org.
Beverly Behan is a New York-based board consultant who has worked with more than 140 boards of directors in the U.S., Canada and internationally in the past 19 years. E-mail: email@example.com.